mark mahaffey ben davies · to the global economy. china’s debt is rising as a % of its gdp, in a...

HINDESIGHT DIVIDEND UK LETTER / MAR 15

Mark Mahaffey Ben Davies

PJ O’Rourke, The American political satirist, once said: “Everybody wants to save the earth; nobody wants to

help mom do the dishes.”

This month in Views, Ben looks at how ‘Smart’ power and the realities of House of Cards, politics and debt is

redefining what he sees as a revival of the realpolitik movement today. No dwelling on the dishes here! Mark

gets down and dirty introducing several interesting dividend plays – a Chilean family heirloom, a sugar

processor to sweeten the HindeSight Dividend portfolio # 1 and invites subscribers to pull up a seat to

participate in the sound growth of an online furniture company developing stores around the UK.

Since the 2008 financial crisis, Hinde Capital has

consistently reported that far from the world’s economies

deleveraging, debt has instead grown in nearly all

countries, in both absolute terms and relative to Gross

Domestic Product. A recent independent report published

by the consultants McKinsey reinforces our work.

Global Debt has grown by

US$57 trillion, raising the ratio

of debt to GDP by 17%.

Developing countries account

for almost 50% of this number

and even though private sector

debt has slowed in the

developed world it still continues

to grow. In contrast,

Government debt has grown by

US$25 trillion, and as Ben

discussed in his piece on the UK

current account, ‘Rule Britannia,

We Will Be Slaves’, fiscal

deficits will need to be reined in.

Source: McKinsey Global Institute

There is no doubt that the long period of recent

financial repression, low interest rates and fiscal

dominance has fostered extremes in asset prices

and asset allocation decisions that will require major

and lengthy adjustment. The question is, can

policymakers engender a gentle adjustment or will

the market exact it? It’s very hard to say with

HINDESIGHT DIVIDEND UK LETTER / MAR 15

policymakers so seemingly able to direct portfolio channels

with ease. One only needs to look at the recent QEURO

effect by Draghi on European stock prices. Never have

prices been at such extremes relative to earnings.

Source: Albert Edwards, Societe Generale

Judging by the surge in the dollar

index globally, we would contend

that the deleveraging process

could become pernicious. We

don’t need to see a rate rise in the

US, which is what the US forward

money market curves are

beginning to price in for later this

year, as excessive dollar strength

is tightening financial conditions.

We have to observe the trade-off

between lower weaker corporate

earnings/exports and stronger

domestic demand, as a result of

the stronger currency.

The key issue really is that we are stretching the ability of

debtors to fund their principal repayments and even their

interest payments. Dollarisation has seen US dollar credit

to non-bank borrower outside the US rise from US$6 to

US$9 trillion.

Since 2011, the Brazilian Real has fallen 47% versus the

dollar. This was once the darling of the BRICs thriving off

resource exports to China. As we have depicted in our Top

of the BoPs – HindeSight Investor Letter – the un-wind of

the creditor countries imbalances is the single biggest risk

to the global economy. China’s debt is rising as a % of its

GDP, in a classic example of Fisher’s debt deflation. They

are no longer buying US Treasuries and global bonds, thus

draining liquidity out of the global system. The yuan will be

weakened as China growth is beginning to collapse, thus

exacerbating the global margin call.

Source: McKinsey Global Institute

Pockets of collapse are already

evident everywhere, especially where

authorities are no longer truly

intervening. Look what happened

when the SNB stopped fixing its

currency – the Swiss franc roared

higher and we began to see the fall-out

of CHF-denominated lending into

Eastern Europe.

For example, Heta (Asset Resolution)

formerly Hypo Alpe Adria International,

has collapsed in Austria. It has not

been declared bankrupt by the

government, who have actually

resumed control despite bailing-in senior debtors. Austria

adopted the EU bail-in law (Bank Recovery and Resolution

Directive) last year – a good thing too – but they have

stepped in as a federal state of Austria, Carinthia, which

has guaranteed Heta bonds would be bankrupted by its

chapter 11 filing. Heta is not the only entity caught in the

crisis, Raiffesien and Erste Bank are in the mix too. Once

again subterfuge reigns supreme.

One key aspect flagged by this debacle is that Heta is

marking its assets to market. This has not been adhered to

anywhere else in the world since 2008, when we moved

from mark-to-market to fair value (to maturity) accounting.

Think about that – the true value of assets is merely being

temporarily underpinned by yet more wasteful liquidity

efforts, i.e. their true value is much lower.

At some point the global margin call will hit risk assets,

which means bonds and stocks will fall in value in tandem.

Recently, risk assets actually broke up in the US, EU and

Europe recharged by QEuro. We saw the price triple tops

(real return charts show only higher prices) that we showed

last month taken out on the upside, only to fall back below

the old ranges. This is reminiscent of 2007. Caution on

direction is warranted here. If the markets cannot rally in

the next few weeks, then downside risks of 10-15% are

realistic. This is a time to focus on stock sector

fundamentals and individuals stock realities. Standard Life

is an example of a company we chose for our portfolio that

is rising, even in the face of a falling overall index.

Everything is relative.

http://www.hindecapital.com/attachments/reports/full/228/original/HindeSight_Investor_Letter_June_2013_-_Top_of_the_BoPs.pdf

http://www.hindecapital.com/attachments/reports/full/228/original/HindeSight_Investor_Letter_June_2013_-_Top_of_the_BoPs.pdf

HINDESIGHT DIVIDEND UK LETTER / MAR 15 3

Inside this edition of the UK Dividend Letter you’ll find:

‘SMART POWER – A HOUSE OF CARDS OR REALPOLITIK(S) I’

BY BEN DAVIES

A CHILEAN HEIRLOOM’ BY MARK MAHAFFEY

‘A PORTFOLIO SWEETENER’ BY MARK MAHAFFEY

‘SMART POWER – A HOUSE OF CARDS OR

REALPOLITIK(S) II’ BY BEN DAVIES

‘TAKE A DIVIDEND SEAT’ BY MARK MAHAFFEY

MARKET & SECTOR ANALYSIS

PORTFOLIO # 1

THE WAY WE THINK / OUR SYSTEM

HOW WE THINK


by Ben Davies

Around 40% of the world’s population has an internet connection today. In 1995, it was less

than 1%. There are over 3 billion internet users currently or almost half the global population.

The first billion users were reached in 2005, the second in 2010.

According to internetlivestats.com, if we observe the top

ten countries by usage penetration, i.e. the percentage

of the population with the internet, the stats are quite

revealing. China’s internet usage is some 641 million

people and so, unsurprisingly, it is number one on the

internet usage ranks. However, it only has 46% usage

penetration out of a country population of 1.4 billion. The

US ranks as number 2 with 280 million users, an 87%

penetration. At number 3, India has 243 million users,

but only a 19% usage penetration. The lowest usage

penetration is Eriteria at sub 1%.

When you eyeball this list of 189 countries’ internet

usage, it becomes clear that the most impoverished

countries have the lowest usage. The cost of

infrastructure, education and corruption are the likely

impediments they face. Most of these countries have an

extreme inequality of wealth, which makes a mockery of

Pareto’s 80:20 principle. I suspect 99.9% to 0.01% is a

more reflective ratio of their wealth divide. These

countries really need the ‘Smart’ power of the internet

to affect sustainable positive economic change and

rebalance this inequality.

Geopolitics and military power has been at the forefront

of the development of many technologies, but this is the

first time that communications and the control of

propaganda has been wrested to a degree from

individual States. Take Eastern Europe, for example.

NATO (US and Europe) is embroiled in confrontation

with Russia, but it is not entirely clear whether the

Ukraine Crisis is a mere proxy war as part of a larger

global power struggle. Knowing who and what to read is

an imperative if we are to understand where the true

conflict lies.

The phrase smart power is more commonly associated

with US international relations, where it refers to the

combination of hard and soft power strategies, rather

than internet influence. It is defined by the Centre for

Strategic and International Studies as "an approach that

underscores the necessity of a strong military, but also

invests heavily in alliances, partnerships, and

institutions of all levels to expand American influence

and establish legitimacy of American action." Some

would call this ‘full spectrum dominance’, others

realpolitik(s).

The internet itself is redefining modern diplomacy and

political behaviour. This new age has delivered us a

global economy that is driven by computing and hyper-

speed communications, which in turn has unleashed

something far greater than just the fast-flowing corridors

of financial capital and free trade I discussed ‘In Views’

last month.

Information Technology has

brought greater knowledge and understanding on every

topic to billions of people. Access to information is no

longer going to be just the preserve of the State, the rich

and the educated classes. The 'Internet Reformation'

has enabled whole populations to educate themselves.

All governments are now answerable to a wider

transparency of political understanding. Individuals can

unite and mobilise themselves against the real or even

perceived injustices of government, at the click of a

button. In short, it’s been highly democratising.

Twitter, the online networking service, where one can

send short 140-character messages (tweets) has come

to symbolise this democratisation, along with that other

social media phenomenon, Facebook. At the Berlin Wall

celebrations Twitter set up a 'Berlin Twitter Wall'. Such

an act would have been deemed unthinkable in the once

Communist East Germany. Of course, nowhere is

perfect. China shut down the Twitter wall after masses

of Chinese users began using it to protest the 'Great

Firewall' of China, but this will not always be so, as the

increasingly technologically savvy populace is

bypassing official information corridors with dark and

light webs.

This new techno-financial economic paradigm is

arguably no different from the Industrial Revolution, the

Ages of Steam, Steel, Electricity, Oil, Automobiles and

mass production, except for two things – the speed of

innovation is far more rapid and it enables the world’s

mass populations to a far greater extent than ever

before.

Both national and personal sovereignty have been

liberalised and threatened by it, as the boundaries have

been obliterated or fortified to offset such radical

change. The Facebook Revolution of the Arab Spring,

literally did mean that 'hope springs eternal', as

Alexander Pope once wrote in 'An Essay on Man'. Fast

forward a few years, though, and the vacuum of power

this created has been filled by ruthless autocrats and

messianic leaders that are arguably even more ruthless

than those previously tolerated by other foreign nations.

Indeed, new and more malevolent forces have arisen;

ISIS has exploited this power vacuum and the social

media circus.

Debates on freedom of speech clash with our rule of law.

Take the censorship and closure of ISIS sympathiser

accounts that promote hatred and murderous intent.

This seems a legitimate process and sensible act,

limiting widespread access to the propaganda that

recruits new jihadists. It’s an interesting debate as to

whether we (Twitter) should allow these accounts to

continue, so that the Intelligence Services can track and

extract valuable information on ISIS and their atrocities.

http://www.berlintwitterwall.com/


Whilst the social communication era has provided a

wider transparency of information, we clearly suffer from

too much opinion and an information overload. As a

result, there is more scope for disinformation and

propaganda on both sides of the spectrum, and the

seeming dumbing down of issues, with the #hashtag

‘wordsmiths’ trivialising the more subtle complexities of

current affairs. Sometimes a single word or phrase

encapsulates the mood of the crowd, but beware the

maddening crowd. It grows and swells

disproportionately to the debate at hand. We market

participants are only too aware of the pernicious and

destructive behaviour of the mania of crowds in

investments. This will never change, but social media

accelerates this process without a pause for thought.

Knowing what to believe is hard at times, but I would

contend that the engines of truth are there and can be

sought more easily than they ever were before. It needs

some flexibility and balance of mind to think through all

sides. Nonetheless, the balance of power is being

disrupted by the Digital (Information) Age of both intra-

and inter-nation states. Intelligence services, censorship

and propaganda have viral complications in the new

world of ‘smart’ power.

(See Election Insights for ‘Smart’ Power - A House of

Cards or Realpolitik(s) II)


by Mark Mahaffey

In Chile, the Luksics are regarded as one of the founding nation families. Policarpo Luksic left

his native Croatia in 1910 to seek his fortune in the mineral-rich Atacama Desert in Chile’s far

north. Despite making a reasonable living in the nitrate industry and marrying well, it was his

two sons, Andronico and Guillermo that made the family fortune which continues to this day.

As of 2011, Policarpo’s second wife, Iris Fontbona, controls the family’s purse strings, via the

Quinenco and Grupo Luksic holding companies. Bloomberg Billionaires Index lists Iris

Fontbona as the 33rd richest person in the world with a net worth of $19.7 bn.

Since 1980, Grupo Luksic has been the major shareholder (currently 65% of ordinary share

capital) in Antofagasta (ANTO: LSE). The Chilean-based copper mining group has been listed

on the London Stock Exchange and a constituent of the FTSE 100 index. ANTO can trace its

roots back to 1888 as the Antofagasta and Bolivia Railway Company that operated a railway

from Antofagasta, a port on the Pacific coast of Northern Chile (and the 2nd largest city), to La

Paz, the capital of Bolivia. Today, it produces over 700,000 tonnes of copper from its vast

mining operations with a market capitalisation of £7.2bn. Although mining has always made up

a sizeable percentage of the UK stock market, despite the last few years of decline, ANTO is

probably the least well-known company, despite 2014 revenue of £3.8bn and net income of

£421mm.


We are recommending the addition of Antofagasta to the HindeSight portfolio this month with

a HDVM® score of 55.92 as the first mining selection in the current portfolio, and we need to

qualify our choice with potentially greater clarity than our more defensive choices.

Most analysts are currently writing negatively, not only about Antofagasta but also all the mining

stocks, and it is easy to see why. The super commodity cycle, inspired by double digit Chinese

growth since 2000, has seen a dramatic growth in demand for those commodities, as well as

price increases. Whether it is iron ore, steel or copper, these have been astounding times. But

after the 2011 peak, the times are a-changing fast. The share price has fallen over 50% since

those heady days and over 15% in the last 12 months – not for the faint hearted it would appear

– but does this tumultuous decline bring opportunity?

There is arguably a reasonable amount of bad news in the price, although copper prices have

fallen again since the start of the year and positive Chinese growth stories despite new stimulus

are very elusive. There is no doubt that 2015 earnings will be severely hampered. The new

dividend policy that sets a minimum level of 35% of net earnings, as well as a free cash flow

and cash balance formulae, has forced analysts to estimate much lower dividend yields than

in the past.


Note

* EV / EBITDA - Enterprise Value divided by Earnings (before interest, tax, depreciation and amortisation)

** HDVM® - Hinde Dividend Value Matrix

The process of mineral extraction and mining is a simple enough business. Prospect, locate,

extract, refine and sell. The difference between sales price and costs gives the margin.

Depending on the margin and the quantity produced gives the income. The complexities arise

from the very large initial and continuing capex, the volatile nature of the market sales price

UK MINING PROVIDERS ABSOLUTE PERF. (12M)

INDEX RELATIVE PERF. (12M)

DVD YIELD (%)

PRICE/BOOK EV/EBITDA* HDVM®**

ANTOFAGASTA PLC -16.77% -18.44% 7.81% 1.89 5.75 55.92

BHP BILLITON PLC -16.07% -17.75% 5.70% 1.66 5.26 54.38

RIO TINTO PLC -7.72% -9.40% 5.18% 1.97 6.50 54.28

ANGLO AMERICAN PLC -19.95% -21.62% 5.35% 0.99 6.15 52.07

GLENCORE PLC -8.93% -10.61% 0.00% 1.27 10.54 48.09


and the input prices, as well as considerable unforeseen factors. Mining usually takes place in

inhospitable far-flung places around the globe, with weather, water and worker issues posing

daily hurdles. Only last week, Antofagasta was in the headlines with news that it had been

ordered to destroy a giant dam it constructed for its Los Pelambres mine to ensure the natural

flow of water to a nearby town. Protestors had blocked access to the mine, forcing an estimated

output cut by around 5,000 tonnes. It is a constant battle.

Hinde Capital has advised the Hinde Gold Fund for almost a decade and seen hundreds of

mining ventures presented, primarily in the precious and base metal arena. We believe that we

are well versed with the pros and cons, and Mark Twain might well have had a point with his

infamous gold mine quote. A look at some of the data will show you some interesting

differences between the mining companies since the turn of the millennium, focussing on

retained earnings and debt levels.


Despite the similarities in commodity prices and costs, the base metals are definitely the better

investment. ANTO figures strongly in the numbers. In basic terms, its earnings are less volatile

and its balance sheet is far superior. In good years it does exceptionally well, paying good

dividends and adding to retained earnings and reducing debt. In bad years, it knuckles down

and loses less or breaks even. This is what we have come to expect in effectively family run

businesses who are the beneficiaries of the long-term strategy plan, quite the reverse from the

poorly run gold businesses, where the shareholder is under constant threat of dilution and

overpaid CEOs. One might also argue that the lifecycle of a copper mine can be far greater

than a typical gold mine, aiding a more consistent future game plan.


Whether China slows less or more, the global population keeps increasing and copper demand

looks likely to continue, unless we can find a way to replace it. The ability for the world, as well

as Antofagasta, to find new sources of economic production of copper will be a constant issue,

but of course this might well be reflected in the price. Long mining lag times like shipping often

produce temporary surpluses and deficits that, while seem potentially catastrophic, usually

work out of time as the market moves back to balance. The secret is all in the timing – being

greedy when others are fearful and vice-versa, as Warren Buffett would say.


The drop in the copper price is well advertised, less so is the reduction in related input costs of

most miners, as a result of the oil price decline and the dollar strength. In ANTO’s case, oil

which is down 50% in the last year, makes up for over 10% of the input costs and the Chilean

Peso is 17% weaker versus the dollar, reducing labour cost considerably too.


In our External Analyst scoring system, Antofagasta lies at 48.15, sitting just below the halfway

point within the index. The general analyst consensus is still quite negative (with 7 out of 30

analysts giving it a positive rating). Our analyst score has become more optimistic over the past

month. The average 12-month target price (TP) is 780p. Analysts have mixed opinions on

Antofagasta, as many are worried about the price of copper.

Our external analyst scoring system* places Antofagasta at 48.15 (range 30-70), which

is a median score.

*(Please see the Portfolio section for a description).

The HindeSight Dividend portfolio’s main focus is to enter into investments that pay a

reasonable level of dividend income and the entry point provides a margin of safety, either from

the recent price decline or from as yet unrecognised increases in future earnings. However, an

all-important but often overlooked aspect of any portfolio is the need for diversification. While

all HSDP’s stocks selection should be able to stand on their own two feet, especially RELATIVE

to the index, stocks will benefit at different times of the economic cycles and the only required

outcome is for the portfolio as a whole to make an excellent return over time.


by Mark Mahaffey

Tate & Lyle (TATE: LSE) is a leading provider of ingredients within the food and beverage industries. They operate across 30 worldwide locations and conduct these operations through two main divisions, which are Speciality Food Ingredients and Bulk Ingredients. Its Speciality Food Ingredients consist of three main areas that focus on proteins/starches, sweeteners and health innovation. Whilst within its Bulk Ingredients they also focus on sweeteners, industrial starches and corn bio-products sold as animal feed.

The group has a long history and it is one of two original members from the FT-30 index, which was introduced in 1935, that still exist today (the other being GKN). In 1875, the sugar cube was invented in Germany by Eugen Langen. The rights to this technology were bought by Henry Tate (British entrepreneur), who then introduced the sugar cube into the UK market. Separately, Abram Lyle was also setting up his sugar business in London, producing Golden Syrup. Three years later, Henry Tate and Abram Lyle were running very successful businesses, independently with Abram Lyle, selling more than a tonne of melting sugar a week. In 1921, the rival firms merged and between them controlled more than 50% of the UK’s sugar refining industry.

Aided by its various developments and acquisitions, Tate discovered Sucralose (no-calorie sweetener) in 1976 and subsequently produced SPLENDA. The firm has grown rapidly and its artificial sweetener business has now become the main driving force of all its business operations.

Most of the groups’ customers are food and beverage manufacturers, which account for more than 75% of Tate’s revenues.

GLOBAL FOOD REFINING PROVIDERS

ABSOLUTE PERF. (12M)


DVD YIELD (%)


TATE & LYLE PLC -6.59% -8.27% 5.18% 2.67 9.20 56.06

ARCHER-DANIELS-MIDLAND PLC

20.03% 18.35% 2.45% 1.56 10.07

INGREDION INC 24.73% 23.05% 2.17% 2.67 9.40

Note




Tate has a HDVM® score of 56.06 currently and enters the HindeSight Dividend portfolio this month. Over the last 12 months, the share price has fallen 6.59% and 8.27% in absolute and relative to index terms. This underperformance can be attributed to:

Commodity exposure

Supply Chain issues

Change in consumption within developed economies

The downturn in global commodity prices has been widespread with the sugar and oil falls squeezing Tate’s profit margins. Over the past year, the producer has issued three profit warnings, causing the stock to fall significantly, with its share price range being approximately 20%.

The groups’ first warning came over 12 months ago when it reported that there had been a large drop in the price of sucralose. With sugar prices reaching a 5-year low in Europe, the price of isoglucose, which is a corn-based sweetener, was dramatically reduced. Just like numerous oil producers that have been impacted by the fall in oil prices, Tate has had to cut its short-term investment plans as the world economy, especially the developing nations, shows signs of slowing down. With oil prices falling, this reduced Tate’s Ethanol (which is used in petrol) margins, given Tate’s significant exposure.


Over the past year, low inventories and a disruption in the supply chain – due to longer than anticipated plant network challenges – caused a misalignment between customer demand and what Tate could provide. This eventually cost the business £40 million in total. Unfortunately, it was understood that £25 million out of the total loss was accounted for by reoccurring Asian and Latin American clients who decided to take their business elsewhere. These supply chain problems were caused by last year’s harsh winter conditions in the US and were responsible for the firm’s second profit warning. In order to fix its supply chain problems and through other acquisitions, Tate & Lyle’s net debt rose. However, when questioned by numerous analysts, Javed Ahmed (CEO) suggested that the firm’s ability to pay its dividend was not under threat, given the group’s strong balance sheet. Historically, the firm’s dividend payments have been very consistent, which demonstrates how well-run the group has been over the years.


Consumption patterns are changing throughout the world. The popularity of ‘junk’ food, which includes soda drinks, is a primary factor for the demand of the type of artificial sweeteners that Tate & Lyle produces. Although there are many new sweeteners, consumption growth has dramatically dropped in North America and Europe due to a fall in the consumption of soft drinks. However, this demand for sweeteners not only remains, but is also getting stronger in South America, Asia and the Middle East.

Diet soft drinks taste very similar to regular drinks as they contain artificial sweeteners, such as sucralose, which has zero calories and does not create cavities. Unfortunately, concerns in the western developed world regarding health (obesity) and the links between diet and major diseases have generally caused many consumers to reduce their consumption of soft drinks. As a result, food producers, such as Tate, are not only facing the short-term challenges of finding sweeteners that meet consumer requirements in these developed areas, but also focusing more on emerging markets. Unfortunately, this has impacted the firm’s margins once again. Javed Ahmed stressed that it had been a difficult 12 months and the company is going through a period of change, trying to reduce its exposure to volatile commodity prices. They are strategically trying to move into higher margin products, such as oat proteins (starch) and artificial sweeteners.

Demand for soft drinks within the US and Western Europe maybe flat or declining, but this is not the case globally. Over the next three years, demand in Latin American, Asian and the Middle East is set to expand rapidly, which is highly supportive for the sweeteners produced by Tate & Lyle.


Tate, with its long history and leading presence in the Food Ingredients industry (which has particularly focused on artificial sweeteners), knows how to adapt to these cycles. Since Javed Ahmed and his management team took over, they have been focusing on their ‘Focus, Fix and Grow’ approach through numerous divestments. Unfortunately, Tate is hampered with short-term supply chain problems and structural changes in commodity pricing, as I stated earlier. The firm, however, has undertaken a complete review of its global supply chain and begun a program to implement changes, with an estimated completion date in June 2016. This means:

IT expenditure is to rise to provide better systems to improve supply and demand planning, which they believe will help with better forecasting

A £100mm incremental spend to support SFI growth to meet demand

The key point here is they underestimated the high level of demand in Latam, which is a good problem to have

As commodity prices stabilise and the management team solve their supply chain issues, this will make Tate a very interesting investment opportunity, especially as it introduces two new products. One of its main drivers of growth will come from its expansion into the emerging and frontier markets as consumption within these particular areas grows. The company will also be supported by a faster growth in margins that are related to its specialist starch products.

Unfortunately, pressure on the price of corn and sucralose, currency exposure and eating habits within the developed markets have suppressed Tate’s share price in the short term.

With its solid balance sheet and re-focused business paired with its depressed share price, Tate could well become a takeover target having become a value opportunity. It was recently reported that the possibility of numerous American suitors, such as Bunge, making an attempt to purchase Tate had become much greater. With the strong dollar and Tate’s low valuation, it has become even cheaper for American rivals to acquire the food producer.


If there was a takeover attempt for Tate, using a very simple methodology of analysing the

firm’s enterprise value, we can see from the chart above that this could command a value that

is around 100 pence greater than where shares are currently trading with a forward EV/EBITDA

at 8.6 and positive FCF.

N.B.

Enterprise value (EV) = Market Capitalisation (MC) + Preferred Stock + Debt – Excess cash.

Companies that have higher debt levels than cash will naturally have higher EVs than MCs. In

a takeover, the most important ratio will be low EV/EBITDA, which will then lead to a focus on

an EV/MC comparison for a potential price target.

In extreme cases, like those that gold miner Allied Nevada in Canada is currently experiencing,

EV= US$552mil whilst MC = US$15m. Although the EV/EBITDA is theoretically at 552/83 =7

times, a low number. The EBITDA, after all expenses and sustaining capex, is always negative.

Last week, Allied Nevada filed for chapter 11.

Tate & Lyle is a well-covered stock, by a wide range of analysts. Over the past month, analysts

have become much more bullish on this business (with 13 out of 17 analysts giving it a buy or

hold rating). Our scoring system suggests that the stock has an average 12-month target price

(TP) of 608p, representing a 2.50% upside from recent prices.

Our external analyst scoring system* places Tate & Lyle at 42.11 (range 30-70), with the

external community becoming more positive on this business.

* (Please see the Portfolio section for a description).

Tate has a reasonable margin for safety with the recent decline, while paying almost a 5% dividend, which is solid. When I first looked at Tate, I thought it would be an excess supply problem, but it turns out they have a positive demand story they underestimated. The firm has moved swiftly to ramp up supply chain efficiency for this demand need. Tate is addressing positively the operational issues. As commodity prices stabilise and emerging markets recover, it will become an attractive investment again.


by Ben Davies

‘House of Cards’, the American political drama, is oddly somewhat emblematic of the

relationship between smart power, the digital age and realpolitik. The drama observes the

realities of US politics today, but it’s the production and delivery of content vis-à-vis an online

streaming service which really makes this a first.

Netflix not only provided this show through on-demand internet streaming, but also funded the

drama’s production. Online streaming services – think Spotify, in the music industry – have

been incredibly liberating for consumers, as they’ve enabled paid subscribers to watch their

chosen content at any time, in any place and for as little or as much as they want. This was

highly democratising for producers of content, as the powerbrokers within the TV and Film

industry – executives, studios and networks – have had their production barriers smashed

down.

Source: Netflix Inc.

‘House of Cards’ has been so successful it’s become the first online-only web television series

to receive and win primetime Emmy Awards. Unsurprisingly, the business model combined

with great content has seen adoption rates at Netflix rise exponentially, driving its earnings and

stock price inexorably higher.

‘House of Cards’ depicts the modern day halls of power in Washington DC, where the ruthlessly

ambitious, yet beguiling Congressman Francis Underwood (played brilliantly by Kevin Spacey)

stomps over anyone and everyone, even the constitution, to avail himself of his ultimate prize

– the US Presidency. With his Southern drawl, Underwood is so loathsome you recoil, whilst

oddly you can’t help but revere him. A little part of us wishes we could be him – or quite possibly

that is just me! Even President Obama was reputed to have said, “At least he gets things done

and Congress needs more of that.” His secret-weapon is his wife, Claire Underwood, the

actress Robin Wright. She exudes sexual power and guile. They are the epitome of a power

couple who want power at any price. The parallels to the Rodhman Clintons are quite clear.

The series opens with congressman Francis Underwood displaying his ruthless pragmatism by

killing a suffering pet dog with his bare hands, while explaining to the audience how there are

times when we require someone to do the unpleasant thing, yet the necessary thing.

Underwood oozes pragmatism in his use of smart power. He personifies what many detractors

believe realpolitik truly is.

Realpolitik is the approach to politics, diplomacy and foreign relations that simply

acknowledges reality, and thus how best to act in (international) politics knowing these

obvious realities. It tends to be non-ideological, holds no ethical or moral high ground

and deals with pragmatics. It often takes a leader who can ignore the popular opinion of

the time to get things done.

To its detractors, realpolitik is often seen as Machiavellian – "the end justifies the

means" – and requires individuals to actually overlook any of their own moral and


ethical obligations. It involves coercive tactics of violence, extortion and economic

suppression.

Francis Underwood certainly fits the bill.

The term realpolitik comes from Ludwig August Von Rochau, a German journalist and politician

in the 19th century. As one can imagine, 'Real' is German for realistic or practical, and of course

'Politik' means politics. Von Rochau coined the phrase in reference to the diplomatic approach

of Klemens Von Metternich, a politician and statesman who served as the Austrian Empire's

Foreign Minister in the early 1800s.

Von Metternich resided over the Concert of Europe, known as the Pentarchy in Germany and

the Vienna system in Russia. This, in a fashion, maintained the balance of power across the

continent and settled many outstanding issues emanating from the French Revolutionary

Wars, Napoleonic Wars and the dissolution of the Holy Roman Empire. This system of

international relations largely held the framework of European international politics for 100

years up until the outbreak of World War I. Another notable practitioner was Ottoman von

Bismark during the same period.

Henry Alfred Kissinger, the US Secretary of State in the Richard Nixon administration, has

come to symbolise modern day realpolitik. He is a textbook example and proponent of this

brand of foreign policy thinking. Interestingly, he was German-born and so, not

unsurprisingly, we find that he wrote a 388-page thesis on Von Metternich while at Harvard

University. He certainly lived out his learnings.

Maybe history has been rewritten, but the internet describes Kissinger as reflective of a ‘smart

power’. In other words, he pursued foreign policy that sought to maintain a balance of power in

which no one nation was dominant. Each nation would maintain its independence by aligning

itself with or opposing other nations, according to its own calculation of the imperatives of

power.

Kissinger achieved the easing of tensions with the Soviet Union, the 'thawing out' known as the

detente in the Cold War era. The horrors of a nuclear Armageddon were not just a perceived,

but a very 'real' threat, as exemplified by the Cuban Missile Crisis. So he chose a functioning

balance of power over any concerns for human rights violations, which was just as well as there

were many carried out by countries he aligned the US with.

Nonetheless, for all his pragmatism, he was responsible for loss of life and atrocities that seem

totally unjustifiable. But, notwithstanding one's own personal belief systems, it's impossible to

comprehend the decisions that had to be made as we don't have the facts as they were

presented at the time.

Kissinger memorably secured Mao's China as a strategic partner, even at a time when dealing

with 'communists' seemed to be a betrayal for many Americans. He was considered at the time

to be narcissistic, but he made unpopular decisions nonetheless. And although he prolonged

the Vietnam War, he also secured withdrawal of US troops from Vietnam through his secret

negotiations. His ego may have enjoyed all that shuttling around the globe, negotiating deals

as a solo representative, but he did get the job done, as one might say.

Oh, so very Underwood. He was evidently aware of the risks of overextension of realpolitik,

whereby nations who seek security can acquire too much power. He realised there had to be

an agreement on common values. Whilst this was at odds with the concept of realpolitik being

non-ideological, one could argue that this was a form of pragmatism.

Kissinger's influence is clear to this day with the now 91-year-old having recently passed on

written reports from his travels and meetings around globe to the Secretary of State, Hilary

Rodhman Clinton. She wrote a glowing review in the Washington Post of his recent book 'World

Order' stating that, despite differences on specific policies, the broad strategy broadly fits the

Obama foreign policy efforts. She quoted Kissinger's summary of the Cold War vision as being

pertinent today:

"… an inexorably expanding cooperative order of states observing common rules and norms,

embracing liberal economic systems, forswearing territorial conquest, respecting national

sovereignty, and adopting participatory and democratic systems of governance."

http://www.counterpunch.org/2015/02/06/why-is-henry-kissinger-walking-around-free/

http://www.washingtonpost.com/opinions/hillary-clinton-reviews-henry-kissingers-world-order/2014/09/04/b280c654-31ea-11e4-8f02-03c644b2d7d0_story.html


This seems a surprising alliance, as it was the democratic left who so despised Kissinger under

Nixon and then President Ford. It perhaps even illustrates the extent to which the Obama

administration has embraced realpolitik(s), despite having a notoriously idealistic President.

Interestingly, Hilary Clinton cites how her strategic rationale was dismissed as "soft". She too

referred to it as "smart power". I find it a compelling review and insight into Clinton's vision, but

I can't help but ask, is it genuine? Is she Claire Underwood in disguise? Certainly her official

emails are never likely to reveal the truth as she has – for ‘convenience’ – used her personal

email while working as Secretary of State. Judging by previous US elections, those seeking a

presidential nomination when the incumbent cannot stand as he has completed two terms tend

to announce their intention about 1 year and 5 months before. For the 2016 Presidential

nomination, this takes us to 1st June 2015.

For those of you who aren’t familiar with the American journal of international relations and US

foreign policy, ‘Foreign Affairs’, it is a leading independent journal published by the Council on

Foreign Relations, a US thinktank. Its members are a veritable who’s who of the US corporate

and political establishment. In this most august of publications, I was surprised to read an article

entitled Why the Ukraine Crisis Is the West’s Fault? by the political scientist Mearsheimer. The

lengthy article was highly critical of American policy towards Russia since the conclusion of the

Cold War. Is this realpolitik(s) at play or an independent thought piece?

In contrast, I read another review of Kissinger’s book ‘World Order’ in the latest ‘Foreign Affairs,

journal. The article, The World According to Kissinger, was reassuringly back on script for a

pro-US foreign policy outfit. Kissinger reasserts his philosophy of maintaining the balance of

power. He also acknowledges the broad reach of globalisation has spread capitalism and free

trade, lifting millions out of poverty, whilst warning that the risks of economic interdependence

can be both a stabilising and disruptive force. In a World order where economic

interdependence has never been greater and the debt burden has risen still further, it is

clear realpolitik should embrace the ‘smart power’ of the people to prevent the ‘House

of Cards’ falling.

The brave new world of technology provides a dilemma for Kissinger, who said: “Knowledge of

history and geography is not essential for those who can evoke their data with the touch of a

button”. He likens today’s digital optimists – those who believe that he democratisation of

cyberspace will solve the world’s most pressing problems – to the naïve Wilsonian idealists of

a century ago. He presents us with this stark commentary: “The mind-set for walking lonely

political paths may not be self-evident to those who seek confirmation by hundreds of friends

on Facebook.”

As for me – am I a realpolitiker or a liberal optimist? – I can’t help but quote the immortal words

of Francis Urquhart, from the original ‘House of Cards’, on which the US version is based: “You

might very well think that; I couldn’t possibly comment.”

Thomas Jefferson, one of the US Founding Fathers and third US President, put it best perhaps.

He said that there should be "but one system of ethics for men and for nations." The Digital

Age is clearly challenging this balance of philosophy.

Finally, is Cameron a realpolitiker? Could this poster win the Conservatives a majority?

Source: www.huffingtonpost.com

http://www.foreignaffairs.com/articles/141769/john-j-mearsheimer/why-the-ukraine-crisis-is-the-wests-fault

http://www.foreignaffairs.com/articles/143062/wolfgang-ischinger/the-world-according-to-kissinger


by Mark Mahaffey

An investment recommendation for Dunelm was made inter-month on February 26th for paid

up subscribers of the HindeSight UK Dividend Letter at 925p. Since then, investors have

received 70p in special dividend and 5.5p interim dividend totalling 8.10% in income, being

mostly reflected in the current price to date, although the FTSE 100 index was some 3% higher

at the time.

Dunelm Group plc, (DNLM:LSE), formerly Dunelm Mill, has come a long way since 1979 when

Bill and Jean Adderley started trading in home textiles from a market stall in Leicester. The first

store opened 5 years later and steady growth over the last 30 years has seen the number of

stores increase to 137 at the last count, with no end in sight. The founders’ son Will Adderley

returned as CEO last autumn with a plan to continue this growth to 200 stores by the end of

the decade, as Dunelm spreads out from its traditional Midlands heartland.

It is the market leader in the £11bn UK home furnishings market, with 13,000 product lines

from a range of furniture, curtains, bedding and kitchenware. Floated on the London Stock

Exchange in 2006, it is now a constituent of the FTSE 250. Last year’s revenue of £730mm,

net income of £89mm and a market capitalisation of £1.76bn growing by the year make this

an interesting investment.


UK HOME PRODUCTS PROVIDERS

ABSOLUTE PERF. (12M)


DVD YIELD (%)


DUNELM GROUP PLC -7.13% -8.81% 2.62% 8.61 12.99 53.42

KINGFISHER PLC -5.65% -19.15% 3.07% 1.39 6.58 52.00

SIGNET JEWELLERS LTD 35.78% 22.29% 0.60% 3.64 17.09 -

Note



Dunelm joins the HindeSight Dividend portfolio this month with a HDVM® score of 53.42.

Although it is clearly a consumer cyclical stock, subject to the incomes of the British public,

arguably it is also a defensive stock. My home is my castle is a lifetime saying here.

Its attractive growth profile is clear, as it gains market share in a growing market place.

Source: Dunelm Group Plc


It is a highly cash generative business, which is not only funding the store expansion and

increasing online sales, but also happily paying back a large percentage of its earnings to its

shareholders. While the listed dividend yield is 2.6% in 4 out of last 6 years, it has paid a large

special dividend averaging 5.32% annual yield.


Dunelm is a well-covered stock by a wide range of analysts, who are reasonably bullish on this business (with 14 out of 16 analysts giving it a buy or hold rating). Those recommending this stock since the start of the year have suggested an average 12-month target price (TP) of 897p, representing a 7.21% upside from recent prices. Our external analyst scoring system places Dunelm at 48.76 (range 30-70), which is a relatively weak score, being in the lower half of our external analyst system.

Dunelm is a straightforward addition to the portfolio. We are focussing on its growth potential,

its cash generation and its high return of cash in special and normal dividends to the

shareholder. While the vagaries of the UK business cycle might well temporarily affect this

retailer, we believe the long-term profile is excellent.


While forward PEs at 16 look more attractive than current valuations, according to analysts’ estimates, we have seen increasing EPS misses of late. However, with zero interest rates reducing the corporate interest expense providing much of the E(arnings) rather than actual growth, there is a strong case for a revised mentality in average PEs. Maybe 25 should be the new norm!

UK INDICES PRICE/EARNINGS RATIO

PRICE/BOOK RATIO

DIVIDEND YIELD (%)

FTSE 100 INDEX 24.09 1.97 3.62%

FTSE 250 INDEX 19.79 2.39 2.97%

The 12M trailing dividend yield here has dropped dramatically to 3.62% from 4.53% last month, primarily due to no longer including Vodafone’s huge capital return last February, amongst others.

There has been a reshuffling of league placings in the sectors this month, with Technology now

leading the pack with ARM and SAGE being strong performers. Basic materials (mining) and

Energy stocks have continued to underperform with the commodity price decline.


The small caps continue to stay rich as the FTSE 250 powers ahead. Although the heavy

weighting of mining and energy to the FTSE100 is a current drag, low interest rates and the

related scramble for yield force investors out of the risk curve.


COMPANY NAME INDUSTRY GROUP DATE ENTERED

ENTRY PRICE

CURRENT /CLOSE

PRICE

INDEX ENTRY PRICE

DVD YIELD

(%)

EX-DIV DATE

RETURN (%) (INCL DIV PAID)

RELATIVE RETURN

(%) (INCL DIV PAID)

STOP LOSS

PRICE*

STANDARD LIFE PLC**

Insurance 02/10/2014 399.20 479.90 6,446.39 3.55% 10/09/2015 17.00% 9.00% 299.40

GLAXOSMITHKLINE PLC

Pharmaceuticals 02/10/2014 1,403.50 1,617.00 6,446.39 4.95% 14/05/2015 18.10% 10.10% 1,052.63

CENTRICA PLC Gas 02/10/2014 301.90 257.20 6,446.39 5.25% 24/09/2015 -14.97% -22.97% 226.43

KINGFISHER PLC Retails 18/11/2014 302.20 369.30 6,709.13 2.69% 14/05/2015 22.07% 18.30% 226.65

ROLLS-ROYCE HOLDINGS PLC

Aerospace/Defense 18/11/2014 845.00 985.00 6,709.13 2.35% 22/10/2015 16.69% 12.92% 633.75

IG GROUP HOLDINGS PLC

Diversified Finan Serv 18/11/2014 620.00 744.50 6,709.13 4.14% 22/10/2015 21.60% 17.83% 465.00

ROYAL DUTCH SHELL PLC-B SHS

Oil&Gas 10/12/2014 2,098.00 2,208.50 6,500.04 5.71% 14/05/2015 6.67% -0.44% 1,573.50

SAINSBURY (J) PLC Food 10/12/2014 226.40 272.50 6,500.04 6.35% 14/05/2015 20.49% 13.38% 169.80

IMI PLC Miscellaneous Manufactur 10/12/2014 1,229.00 1,347.00 6,500.04 2.79% 13/08/2015 9.68% 2.57% 921.75

HSBC HOLDINGS PLC

Banks 16/01/2015 593.00 578.40 6,550.27 5.68% 21/05/2015 -0.20% -6.49% 444.75

VODAFONE GROUP PLC

Telecommunications 16/01/2015 228.30 227.90 6,550.27 6.15% 11/06/2015 -0.42% -6.71% 171.23

NATIONAL EXPRESS GROUP PLC

Transportation

16/01/2015 259.60 286.30 6,550.27 3.60% 03/09/2015 10.36% 4.07% 194.70

BABCOCK INTL GROUP PLC

Commercial Services 11/02/2015 1,050.00 995.00 6,818.17 2.01% 02/07/2015 -5.43% -7.54% 787.50

ROYAL MAIL PLC Transportation 11/02/2015 438.00 449.20 6,818.17 2.96% 02/07/2015 2.79% 0.68% 328.50

DUNELM GROUP PLC Retail 26/02/2015 925.00 836.50 6,949.73 2.45% 26/11/2015 -1.71% -1.89% 693.75

ANTOFAGASTA PLC Mining 17/03/2015 690.50 690.50 6,962.00 1.99% 17/09/2015 0.00% 0.00% 517.88

TATE & LYLE PLC Food 17/03/2015 615.50 615.50 6,962.00 4.56% 25/06/2015 0.00% 0.00% 461.63

PORTFOLIO 3.95% 7.22% 2.52%

Note:

**Standard Life entry price does not reflect the after 9 for 11 share split. The return includes the 73p return of capital

*Stop Loss Price is 25% below the entry price

Standard Life has rallied strongly through the month of February. It is up over 10%, spurred by the albeit expected announcement of the 73p return of capital, which goes ex-div on 16th March, and also the 11.43p final dividend on 9th April. There will also be a 9 for 11 share consolidation on ex-div date to equalise the stock price for the return of capital.

Glaxo will pay its 4th Interim dividend of 23p on April 9th after going ex-div on February 19th equal to 1.5%. Much of the headline news of corruption has been consigned to the back page and GSK is getting on with its drug development. The good news is it had a successful phase III trialling for its new shingles drug. This began 4 years ago.

Centrica continues to disappoint in the HSP, down over 20% since recommendation. The stop loss is at 226.43p. Uncertainty in the weather and politics remains a concern.

Rolls Royce has performed well over the month, trading at 1000p for the first time in 6 months. Investors are finally focussing more on their growing long-term order book and less on the short-term past history.


IGG has seemingly re-rated above 700p now from last autumn on its earnings upgrades and stabilised in quiet trading. The dividend yield at 4.80% continues to be attractive.

Improving European markets have lifted KGF since November and continue to show strength. The next ex-div date is May 14th for 7p.

Royal Dutch Shell has traded poorly over the month, despite the stabilised oil price. Longer term the concerns for paying dividends out of asset sales will no doubt be asked and re-asked. As the largest FTSE 100, it is a major drag on the index to date.

Until recently, Sainsbury’s was recovering well from its Tesco lows of last year. The estimated dividend yield is still almost 6% and ex-div on May 14th. Arguably a good defensive stock on any index sell-off.

Despite an excellent run which saw it reach 1450, IMI’s subsequent retracement to 1325 is disappointing, but in the longer term this remains well supported by earnings. Its next ex-div date is April 9th for 24p.

HSBC had its 4th interim ex div date on Feb 23rd for 13p, but continues to languish as we get used to seeing its directors appear in front of MPs’ for grilling.

Despite the support of the almost 6% dividend yield, VOD is suffering from the uncertainty of lack of major merger or acquisition.

National Express has been a strong performer, aided by the strong dollar and its continued growth in acquiring overseas contracts. Ex-div date of April 30th for final dividend of 6.95p is also attractive.

We wrote that uncertainty over the UK general election was the reason for Bab’s poor performance. This has continued, as the outlook for a Labour/SNP outcome would not be seen positively. Losing a recent contract for LCST to a US rival has also been a catalyst for recent weakness.

Royal Mail remains in a tight range around 430p with a lack of current updates. The final dividend ex div date is July 2nd for 13.3p.


We passionately believe that dividends really, really matter.

William Thorndike in his fascinating book ‘The Outsiders - Eight Unconventional CEOs and

Their Radically Rational Blueprint for Success’ examined one of the most important aspects of

running a business a CEO must undertake: Capital Allocation. He summarised how a CEO

deploys capital in order to best utilise cash flow generated from his or her business operations.

Essentially, CEOs have 5 ways of deploying capital:

Investing in existing operations

Acquiring other businesses

Repaying debt

Repurchasing their own stock (buybacks)

Paying dividends

Dividend payments are a crucial operation in creating stakeholder wealth. It is this aspect of a

business that we are so fixated by – the propensity for a company to produce and continue to

grow dividends so that we may accrue wealth over a generation. But as readers will know we

can’t just grab stocks with the highest yield for fear that this signals some cash flow or even

solvency issues for the firm. So it is with this very real threat in mind we explore only well-

capitalised FTSE 350 companies.

This letter’s purpose is to help inform readers on dividend investing so that they can construct

a portfolio of sound UK dividend stocks based on our recommendations.

Our prerequisite is that any stocks selected for this letter must be liquid, well-capitalised with a

strong free cash flow and a progressive dividend policy.

Every month we will provide a write up of 3 to 4 stocks until we create a portfolio of 25 UK

dividend stocks. This will be the HindeSight UK Dividend Portfolio #1

You will be alerted by subscriber email intra-month when these stocks become a buy. Timing

is critical to the strategy, not only buying quality stocks but buying them at the right time

The entry points will then be recorded in the next monthly in the HindeSight UK Dividend

Portfolio section and the stock(s) written up in full

We will run our winners but tend to rotate every 6 months depending on specific criteria which

would elevate cheaper companies into the portfolio relative to stocks that had performed

The basis for stock and portfolio selection is derived from our quantitative systematic

methodology which screens these companies using the Hinde Dividend Value Matrix®,

(HDVM®), a proprietary stock-rating system

In the section on ETPs we will highlight our investment philosophy and the investment process

behind our stock selections. This is the basis of our dynamic risk and money management in

our portfolio construction for you. You can also read the stand-alone Hinde Dividend Value

Strategy document to see the methodology behind our stock selection


“We have met the enemy, and he is us.” Walt Kelly

Our key to long-term performance investing is premised on the following:

Systematic rule-based strategy

Systematic risk and money management

Occam’s razor, aka ‘K.I.S.S.’, Keep It Simple Stupid

Consistency

Discipline

All our investment ideas are rule-based methodologies driven by systematic and quantitative

models.

Hinde Dividend Value Strategy seeks to generate a total return from an actively managed

basket of UK dividend-paying stocks. The strategy selects 20 highly liquid, mid-to-large

capitalised stocks on an equally-weighted basis, which offer the highest total return potential.

The 50% Hedge version of the strategy would then be subject to a strategic Beta Hedge*,

which is designed to cover 50% of the value of the UK stock basket at all times.

The 50% hedge is maintained using UK equity benchmark indices to reduce exposure to

overall market volatility, but without reducing overall total returns to the market over the long

run. The Hinde Dividend Value Strategy (100% Hedge) would deploy a full beta hedge at all

times.

The strategy employs a quantitative, systematic methodology, whereby FTSE 100 and FTSE

250 constituent stocks are screened using the Hinde Dividend Value Matrix®, a proprietary

stock-rating system. We use the same system to select stocks for any of our strategies, long-

only, 50% Hedge or 100% Hedge. The only difference is clearly the extent of the hedge on

the exposure to the overall market.

The basic premise of the strategy is to accelerate returns by selecting relatively high yielding

stocks which offer the highest potential for capital revaluation. The dynamic rotation of stocks

each quarter enables us to sell stocks where the capital revaluation and dividend has been

captured, and use this additional capital to invest in more undervalued quality companies. If

successful, this cycle of capture and re-investment offers the chance to significantly improve

the total return generated by the Dynamic Portfolio.

The basis of the stock selection process is the Hinde Dividend Value Matrix®, which is a

derived process that looks at 3 crucial variables:

* Beta is the stock’s sensitivity to market movements, e.g. if a share has a beta of 1.5 its price tends to move by

1.5% for each 1% move in the index

The top ranking stocks will be those offering a relatively high dividend. A composite of the

following criteria comprises the Dividend Rank:

Relative Dividend Yield

Dividend Capture

Payout ratios

The Relative Dividend Yield assesses if a company pays a higher dividend than the Index it

derives from (the FTSE 100 or FTSE 250). The Dividend Capture criteria explain how quickly

and how much of the dividend is paid at any point in time. The Payout Ratio gives a snapshot

of whether a company will be able to maintain and grow its dividend. It helps us to assess

how much of a company’s revenue, profit or cashflow is paid out in dividends.


The lower the amount of dividends paid out as a percentage of profits, the healthier future

dividend potential will be. History is for once a good guide as to whether companies will

continue to pay and grow their dividends. A stock with an excessively high yield relative to its

sector or the overall market is invariably showing signs of heightened risk to its dividend

sustainability and often the viability of the company itself. The screen incorporates a limit on

yield dispersions from the overall market.

The strategy is emphatically not a yield chaser. It is the Performance and Value screens that

are used to assess the total return potential of a stock by analysis of how undervalued it is

relative to its fundamentals, sector and overall market index.

The top ranking stocks have the poorest relative performance to their index over multiple time

horizons.

A composite rank of the following criteria provides the Performance Rank:

Stock relative performance ranked over multiple time periods

Average of time periods taken to select rank of stocks

The top ranking stocks by key fundamental criteria show stable fundamentals and exhibit

upside momentum growth potential. The following are some of the criteria that provide the

Value Rank:

Value - Price to Book (intangible book adjustment), Free Cash Flow metrics

Quality - Return on Investment and Earnings metrics

Financial Stability - Debt levels, Coverage and Payout ratios

Volatility - Stock variance, Dividend variance

Momentum - Sales Growth, Cashflow metrics

Liquidity - Minimum market capitalisation relative to index, Shares outstanding

The FTSE 100 and FTSE 250 stocks are ranked using the Dividend, Performance and Value

screens. An equally-weighted composite rank is then taken of these 3 ranks, which provides

a final ranking from which a selection of 20 stocks is made for the portfolio.

The stocks with the highest ranking are compiled for the FTSE 100 and the FTSE 250. The

top 10 from each index are then taken, subject to diversification rules, which entail that

normally only 1 stock per sector per index can be invested in. For example, if the top 10

stocks are all mining companies, the selection process would take the first of these and then

move on to select the next top stock from another sector. As long as a stock has the highest

score in its sector, the fact that it has appeared in the final ranking means it is already eligible

for investment. In exceptional circumstances, it may be that more than one stock has to be

selected from an individual sector.


This score is derived from 3 inputs that have been obtained from all the external analysts at

leading institutions who are covering the stock:

1. The 12 month target price in relation to current price

2. The number of analysts covering the stock

3. The recommendation analysis, e.g. STRONG SELL, SELL, UNDERPERFORM or

HOLD

This score is used to observe the other analysts’ view of the stock and is helpful when

understanding the methodology that other analysts use to determine their 12-month target

price. We ultimately get a blend of price targets that is based on different valuation metrics.

1. The combined score will vary from 30-70

2. A stock with a lowest score of 30 shows the majority of analysts not only have a full

sell/underweight recommendation, but also a low 12-month target price in relation to

current price.

3. A stock with the highest score of 70 shows the majority of analysts not only have a

full buy/overweight recommendation, but also a high 12-month target price in relation

to current price.

Note:

- On a standalone basis, the EAS score must be viewed in the following context:

Equity analysts issue far more positive recommendations than negative

If all analysts are overwhelmingly bearish or bullish, then this can signal a contrarian position

be held, but this is determinate on the where the stock is valued.

- However, in conjunction with the HDVM®, we have found the score to be useful when it is

high or momentum is turning higher, as this suggests that the stock offers deep value.

Disclaimer This newsletter is intended to give general advice only on the importance of dividends within the equity space. The investments mentioned are not necessarily suitable for any individual, and you should use this information in conjunction with other advice and research to determine its suitability for your own circumstances and risk preferences. The value of all securities and investments, and the income from them, can fall as well as rise. Your investments may be subject to sudden and large falls in value and you may get back nothing at all. You should not buy any of the securities or other

investments mentioned with money you cannot afford to lose. In some cases there may be significant charges which may reduce the value of your investment. You run an extra risk of losing money when you buy shares in certain securities where there is a big difference between the buying price and the selling price. If you have to sell them immediately, you may get back much less than you paid for them. The price may change quickly, particularly if the securities have an element of gearing. In the case of investment trusts and certain other funds, they may use or propose to use the borrowing

of money to increase holdings of investments or invest in other securities with a similar strategy and as a result movements in the price of the securities may be more volatile than the movements in the price of underlying investments. Some investments may involve a high degree of ‘gearing’ or ‘leverage’. This means that a small movement in the price of the underlying asset may have a disproportionately dramatic effect on your investment. A relatively small adverse movement in the price of the underlying asset can result in the loss of the whole of your original investment. Changes

in rates of exchange may have an adverse effect on the value or price of the investment in sterling terms, and you should be aware they may be additional dealing, transaction and custody charges for certain instruments traded in a currency other than sterling. Some investments may not be quoted on a recognised investment exchange and as a result you may find them to be ‘illiquid’. You may not be able to trade your illiquid investments, and in certain circumstances it may be difficult or impossible to sell or realise the investment. Investment in any of the assets mentioned may have tax

consequences and on these you should consult your tax adviser. The opinions of the authors and/or interviewees of/in each article are their own, and are not necessarily those of the publisher. We have taken all reasonable care to ensure that all statements of fact and opinion contained in this publication are fair and accurate in all material respects. All data is from sources we consider reliable but its accuracy cannot be guaranteed. Investors should seek appropriate professional advice if any points are unclear. Ben Davies and Mark Mahaffey the editors of this newsletter, are responsible

for the research ideas contained within.They or any of the contributors or other associates of the publisher may have a beneficial interest in any of the investments mentioned in this newsletter. Disclosures of holdings: None relevant to any content discussed within this issue of the newsletter

mark mahaffey ben davies · to the global economy. china’s debt is rising as a % of its gdp, in a...

Documents